First Quarterly Price Decline for U.S. since 1994

For Immediate Release November 29, 2007
OFHEO (Office of Federal Housing Enterprose Oversight)

Washington, DC – For the first time in nearly thirteen years, U.S. home prices experienced a quarterly decline. The OFHEO House Price Index (HPI), which is based on data from sales and refinance transactions, was 0.4 percent lower in the third quarter than in the second quarter of 2007. This is similar to the quarterly decline of 0.3 percent (seasonally-adjusted) shown in the purchase-only index. The annual price change, comparing the third quarter of 2007 to the same period last year showed an increase of 1.8 percent , the lowest four-quarter increase since 1995. OFHEO’s purchase-only index, which is based solely on purchase price data, indicates the same rate of appreciation over the last year.
The figures were released today by OFHEO Director James B. Lockhart, as part of the quarterly report analyzing housing price appreciation trends.
“While select markets still maintain robust rates of appreciation, our newest data show price weakening in a very significant portion of the country,” said Lockhart. “Indeed, in the third quarter, more than 20 states experienced price declines and, in some cases, those declines are substantial.”
Many of the cities and states experiencing the sharpest declines this quarter were the same cities and states experiencing the sharpest increases just a couple of years ago, suggesting some price corrections in those markets.
Nationally, house prices grew at the same rate over the past year as did prices of non-housing goods and services reflected in the Consumer Price Index. House prices and prices of other goods and services both rose 1.8 percent.
“Rising inventories of for-sale properties are clearly having a material impact on home prices,” said OFHEO Chief Economist Patrick Lawler. “Until those inventories shrink, that will be a great source of resistance to price increases.”
It should be noted that the annual growth rate of 1.8 percent is significantly different from other indexes, which are showing depreciation. The OFHEO index weights sales prices differently than other measures, incorporates data from a wider geographic area, and is focused on homes with conventional, conforming loans. A more thorough discussion of differences can be found in “ A Note on the Differences between the OFHEO and the S&P/Case-Shiller House Price Indexes .”
Significant HPI Findings:
Highest and Lowest Appreciation :
1. Ten states saw price declines over the latest four quarters, the greatest number of declines since the 1996-97 period. Twenty-one states saw price declines in the latest quarter.
2. The states with the greatest rates of appreciation between the third quarter of 2006 and the third quarter of 2007 were: Utah (12.9%), Wyoming (11.8%), Montana (7.7%), New Mexico (7.4%), and Washington (7.0%). The states with the largest depreciation for the same period were: Michigan (-3.7%), California (-3.6%), Nevada (-2.4%), Massachusetts (-2.3%), and Rhode Island (-2.2%).
3. For the third consecutive quarter, Wenatchee, Washington exhibited the highest four-quarter appreciation among the 287 Metropolitan Statistical Areas (MSAs) on OFHEO’s list of “ranked” cities. Annual appreciation in Wenatchee was 15.7 percent.
4. Other MSAs with the greatest appreciation between the third quarter of 2006 and the third quarter of 2007 were: Provo-Orem, Utah (14.4%), Grand Junction, Colorado (14.1%) and Ogden-Clearfield, Utah (14.0%). The MSAs with the largest depreciation for the same period were: Merced, California (-13.0%), Punta Gorda, Florida (-11.8%) and Santa Barbara-Santa Maria-Goleta, CA (-11.6%).
State and MSA appreciation rates can be found on pages 18-19 and 31-52.
Other Notable Results :
1. Of the 287 cities on OFHEO’s list of “ranked” MSAs, 204 had positive four-quarter appreciation and 83 had price declines.
2. Seventeen of the 20 cities having the most depreciation were in Florida and California. The other three were in Michigan.
3. For the fifth consecutive quarter, Utah’s four-quarter appreciation rate exceeded rates in all other states. At 12.9 percent, price appreciation in Utah was more than a percentage point higher than the four-quarter appreciation in Wyoming—the state with the second highest rate.
4. Twenty-four of the 26 California cities on the ranked list experienced price declines between the third quarter of 2006 and the third quarter of 2007. Thirteen of the 24 evidenced price declines of 5 percent or more.
Purchase-Only Index
An index using only purchase price data indicates the same price appreciation for the U.S. over the latest four-quarters as the standard, all-transactions index. Both indexes estimated 1.8 percent price appreciation between the third quarter of 2006 and the third quarter of 2007. The purchase-only index fell 0.3 percent (seasonally-adjusted) between the second quarter of 2007 and the third quarter of 2007, compared with a 0.4 percent price decline for the HPI. The difference between the two price measures may reflect differences in the types of homes refinanced versus those purchased valuations or different proportions of appraisal and sales price data.
For specific Census Divisions and states, the all-transactions and purchase-only indexes sometimes estimate significantly different price changes. This quarter’s purchase-only indexes estimate particularly sharp price declines in states with the weakest housing markets, including California (7.2 percent four-quarter price decline) and Michigan (7.1 percent four-quarter price decline). A short comparison of the purchase-only and all-transactions indexes can be found in the first part of the “Highlights” section on pages 8-10.
Highlights
This period’s HPI release also includes an analysis of the relationship between home prices and foreclosure activity. The article, which can be found on pages 11-17, discusses how the two are related and compares appreciation rates for high and low foreclosure areas.
Background
OFHEO’s House Price Index is published on a quarterly basis and tracks average house price changes in repeat sales or refinancings of the same single-family properties. OFHEO’s index is based on analysis of data obtained from Fannie Mae and Freddie Mac from more than 33 million repeat transactions over the past 32 years. The more limited “purchase-only” index is based on more than five million transactions.
OFHEO analyzes the combined mortgage records of Fannie Mae and Freddie Mac, which form the nation’s largest database of conventional, conforming mortgages. The conforming loan limit for mortgages purchased in 2006 and 2007 is $417,000.
This HPI report contains four tables: 1) A ranking of the 50 States and Washington, D.C. by House Price Appreciation; 2) Percentage Changes in House Price Appreciation by Census Division; 3) A ranking of 287 MSAs and Metropolitan Divisions by House Price Appreciation; and 4) A list of one-year and five-year House Price Appreciation rates for MSAs not ranked.
OFHEO’s full PDF of report is at: www.ofheo.gov/media/pdf/3q07hpi.pdf. Also, be sure to visit www.ofheo.gov to use the OFHEO House Price calculator. Please e-mail ofheoinquiries@ofheo.gov for a printed copy of the report. The next HPI report will be posted February 26, 2008.

The Nice Person Isn't Always In Your Best Interest

A friend of mine sent me this newspaper article today - I wanted to share it with people because it goes to show a very valuable lesson - nice people do not always have your best interest at hand - sometimes its the tough love that keeps you going in the right direction and above water.

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Ron French and Mike Wilkinson / The Detroit News Tuesday, November 27, 2007

Easy money, risky loans drive area home losses
70,000 filings for foreclosure in the past two years; Worst isn't over as mortgage rates adjust up
Ron French and Mike Wilkinson / The Detroit News
A lot of people made money on Ethel Cochran's home during the years.
There was the nice man who sat in her living room in 2004 and offered to lower her house payments. There was the company that sent her a letter the next year proposing a way to pay off her bills by refinancing. In 2006, she refinanced again when a gentleman on the phone claimed he could lower her payments and get her some cash. A few months later, a woman knocked on her door with yet another offer.
"I thought she was a nice lady," said Cochran, 68, of Detroit. "She said she could help me."
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After buying her home for $8,000 in 1987, Cochran now owes 14 times that amount -- multiple refinancings larded with commissions have left her with a $116,000 mortgage she can't repay. Her latest lender took a $30,000 loss on the house. Her neighbors are losing money, too: Foreclosures drop the value of nearby homes.
Cochran took family photos off the walls this month, waiting to be evicted from her home of 20 years. "I don't know what happened," Cochran said.
A Detroit News investigation reveals that a cash-drunk mortgage industry with virtually no government oversight has turned Metro Detroit into a foreclosure factory, where foreclosure notices were served on 260 homes a day in August -- the equivalent of wiping out two subdivisions every 24 hours.
More than 70,000 homes in Metro Detroit -- equal to every residence in Southfield and Livonia -- have entered some phase of foreclosure in less than two years, according to The Detroit News analysis of foreclosure data. A pace that was already an all-time record in January 2006 has jumped six-fold since then, crippling the mortgage industry, driving down property values and leaving tens of thousands of families financially broken.
The News found that the economic cancer rooted in the foreclosure crisis has spread deeper and wider than previously known. More than 1 million homes in Metro Detroit -- 2 out of 3 households -- are worth less today because their value has been damaged by nearby foreclosures, according to a study by the Center for Responsible Lending, a consumer advocacy group focused on predatory lending.
The cost in Metro Detroit home values, lost assets and unrecovered property taxes so far: an estimated $1.6 billion, according to the Center for Responsible Lending -- enough to buy every home in the city of Grosse Pointe and Grosse Pointe Shores.
Once a relatively isolated event, foreclosures have become an economic plague, infecting the poorest and wealthiest neighborhoods and afflicting even residents who have never had a mortgage.
And it's going to get worse. The number of risky adjustable-rate loans scheduled to reset to higher interest rates is still going up, with the peak expected in March. That means foreclosures likely will rise for at least another year.
How Metro Detroit became one of the foreclosure capitals of America -- and the far-reaching impact of that title -- is a story of old vices and new schemes, where a system fueled by cash emptied the bank accounts of tens of thousands area residents.
"At the time, it was like the wild, wild West out there," said former mortgage loan officer Nicole Jackson. "We didn't realize what the fallout would be."
Mortgage crisis rocks banks
The savings and loan debacle of the 1980s is considered to be the costliest banking scandal in history, costing investors, banks and the government about $150 billion. Yet that financial crisis may be dwarfed by the final cost of the current mortgage meltdown. Bad mortgage debt may cost banks as much as $400 billion, according to Deutsche Bank; property values may sink another $223 billion. The human cost is even more alarming: As many as 2 million Americans may lose their homes before the housing meltdown ends.
But the nation's foreclosure crisis pales in comparison to Metro Detroit's housing implosion. The United States is struggling with an all-time high rate of one foreclosure filing for every 80 households in the country since January 2006, according to RealtyTrac data. In Metro Detroit, using the same data, 1 in 21 homes has been in some phase of foreclosure in that time. The city of Detroit's foreclosure rate is eight times the national average.
Not all notices lead to foreclosures. Some homeowners catch up on their payments while others negotiate more manageable terms. The majority find a way to refinance their overdue loans, often with loans that begin with affordable "teaser" rates, before escalating quickly. Still, the number of foreclosure filings offers a glimpse at the scope of the crisis in the region and the nation.
There are some Detroit neighborhoods where 1 in 7 homes received a foreclosure notice between January 2006 and September 2007. In the city as a whole, 1 in 10 homes has had a foreclosure notice in that time.
Relatively affluent suburban neighborhoods don't escape unscathed. In Lathrup Village, where the median household income is $107,000, 1 in 20 homeowners have been in some phase of foreclosure since 2006; in Lyon Township, 1 in 27 are in financial straits. In all, 112 of Metro Detroit's 130 communities -- where 92 percent of area residents live -- have foreclosure rates above the national average.
Michigan is first in the nation in delinquencies of subprime loans -- loans made to riskier borrowers in which the interest rate is at least 3 percent higher than for loans that can be offered to those with good credit. Delinquencies are the first step on the road to foreclosures. The state is first in FHA delinquencies, second in VA delinquencies and fourth in delinquencies on loans at better prime rates.
Five of the 10 worst ZIP codes in the nation for foreclosure are in the city of Detroit. A ZIP code in Cleveland is No. 1, followed by Detroit's 48228 and 48205. Chicago, Indianapolis and Atlanta also have ZIP codes in the top 10.
'Confluence of ugliness'
Michigan is an anomaly in the foreclosure crisis. Other states with the highest rates of foreclosure -- California, Florida and Nevada -- experienced housing booms in recent years with rampant speculation. Investors bought homes only to sell them six months later for a profit.
Michigan real estate never escalated -- or plummeted -- as much as in those states. It's not because its biggest city, Detroit, is one of the poorest big cities in America -- it's been poor for years and not had such high foreclosure rates.
Michigan's recession and nation-leading unemployment have played a role, but Michigan has had unemployment rates twice as high as it is today without approaching the current levels of foreclosure.
The sky-high foreclosure rate of Michigan -- and particularly Metro Detroit -- has as much to do with the mortgage industry as the auto industry.
"It was a confluence of ugliness," said John Kloster, an investment adviser based in Sylvan Lake. "It was our one-state recession, people trying to maintain their lifestyles, and money that was incredibly easy to borrow."
Kloster traces the origins of today's meltdown to 1984, when credit card interest stopped being tax-deductible.
After that, it made sense for homeowners to finance a better lifestyle with equity loans, on which the interest remained tax-deductible.
During the past few years as the state's economy drooped, "people lost their auto jobs. If you're struggling to keep your kid in college and keep your nice cars, the easiest way to do it was to suck money out of your house."
Metro residents pay more
Metro Detroiters paid higher mortgage interest rates and were more likely to get adjustable-rate mortgages for those loans than homeowners anywhere else in the nation. About 55 percent of mortgage loans in the region in 2006 were subprime, meaning the interest rates were at least 3 percentage points higher than the rates supposedly available to borrowers with good credit. That's double the national average, according to an analysis of national loan data by Association of Community Organizations for Reform Now (ACORN), a national consumer advocacy group. In Wayne County, 2 out of 3 home loans were subprime.
A lot of those homeowners probably qualified for better loans. A Fannie Mae study found that one-third of home buyers who received subprime loans qualified for prime loans, which could have saved them between $50,000 and $100,000 during the course of the loan and greatly decreased the odds of foreclosure. Unwitting home buyers were sold more costly loans by officers who often received bonuses for doing so.
The reasons why the region's residents received worse loans than borrowers elsewhere has as much to do with Wall Street as Cass Avenue.
Until the 1980s, almost all foreclosures were caused by personal tragedies of some kind -- death of a breadwinner, divorce, job loss or medical bills. While the majority of foreclosures are still the result of those factors, Cochran and thousands like her are losing their homes from causes that didn't exist 25 years ago.
Most mortgages today are sold in bundles of hundreds or thousands on the bond market. Investors -- and managers of the mutual funds many of us own in our 401(k) plans -- purchased the bonds because the interest they received on those mortgages was higher than their return on investment on other bonds. While housing values were rising and foreclosures low, those mortgage-backed bonds were big moneymakers.
To meet the market's demand for more mortgage-backed bonds, the mortgage industry had to sell more loans. To do that, lenders had to find new borrowers, and they often found them in urban areas traditionally shunned by banks. To make loans to low-income home buyers, many of whom had questionable credit, lenders loosened loan qualification standards.
"Wall Street got an appetite for high-interest loans, so lenders published ridiculously (lenient) loan guidelines," said Emil Izrailov, who started his career as a subprime mortgage officer and is now chief operations officer for Kaye Financial Corp. in Bloomfield Hills.
Along Detroit's poor streets such as Cass Avenue, lenders found homeowners who were both eager to borrow money, and who often lacked the sophistication to evaluate the risks of the loans.
Once numerous subprime mortgage shops opened in Detroit and marketed heavily on radio and billboards, the risky loans spread to the suburbs.
'Immoral and unethical'
Lenders worked on volume. "In the name of production, a lot of lenders took those products and inappropriately applied them to consumers," said Bill Matthews, senior vice president of the Conference of State Bank Supervisors, which advocates for state banking systems. "It was immoral and unethical."
It didn't matter if homeowners couldn't afford their adjustable-rate mortgages after their low, teaser rates ended; the profits from those who would refinance would offset the losses of those whose homes were foreclosed.
Some lenders were unwilling to work with homeowners who fell behind on payments, often because the company collecting payments was separate from the company that owned the loan.
When Karen Buegel lost a job and her income was cut in half, she called her mortgage company repeatedly, offering to make partial payments on her St. Clair Shores home until she could get back on her feet.
"I said, 'Let me pay something,' " Buegel said, "and they said they weren't interested unless I had the whole payment."
When her home was foreclosed earlier this year, Buegel owed about $135,000. The house sold at auction for $103,000.
If the lender was willing to lose money by selling the home for less than Buegel owed, why weren't they willing to accept less money from her, Buegel wonders.
The reason, Matthews explains, has nothing to do with the credit worthiness of the struggling homeowner, and everything to do with the "bundling" of loans to investors.
"When you pool a lot of mortgages together, it gives you diversity," Matthews said. "If you have a high enough yield on those mortgages, it doesn't matter if some of these loans go bad.
"What the hedge fund manager is missing, is it's destroying communities."
Many stuck with homes
Sharon Baldwin is a victim of foreclosure, and she's never missed a payment on her Huntington Woods house.
The 30-year-old accepted a great job in a Chicago public relations firm in early 2006, with an office that looked out over Lake Michigan. She loved the city and the job, but quit nine months later to return to Metro Detroit.
"I couldn't sell my house," said Baldwin, who couldn't afford a house payment in Michigan and rent in Chicago. "I know two other people like me who moved back from Chicago because they couldn't sell their homes. Whether it's foreclosures or economy, it's pulling the whole area down."
Millions of Metro residents have become collateral damage of the foreclosure explosion. From people such as Baldwin, who are virtually prisoners because no one will buy their homes, to Realtors whose income has been gutted, to homeowners afraid of the drug dealers setting up shop in vacant homes, foreclosures are hurting almost everyone. The housing meltdown has become the economic equivalent of secondhand smoke, causing damage to anyone nearby.
The tab for foreclosures -- in lost assets, unrecoverable loans, lost property value and uncollected property taxes -- on subprime loans made in 2005 and 2006 could reach $1 billion in Wayne County alone, according to an analysis of federal loan reporting data by the Center for Responsible Lending. In Oakland County, the cost is projected to be $363 million; in Macomb County, $289 million.
About 90 percent of those costs are borne by people and institutions other than the foreclosed homeowners. According to a study by the Association of Community Organizations for Reform Now (ACORN), lenders are the biggest losers, absorbing 38 percent of the cost. The flood of foreclosures has forced a number of mortgage lenders in the region to shut their doors in recent months, putting hundreds out of work.
Local governments are estimated to absorb 21 percent of the cost of foreclosures, mainly in losses in tax revenue.
Residents who don't even have mortgages are being financially damaged by the foreclosure crisis. Metro Detroit home prices have plummeted 18 percent since 2004; in Wayne County, values have dropped by more than a third in that same time. Rising interest rates, tighter lending standards and a nation-high unemployment level are likely the leading causes, but foreclosures are accelerating the decline. Industry experts estimate conservatively that every foreclosure drops the value of other homes within a block by 0.9 percent. That means an average home in Farmington Hills loses more than $2,000 in value when a nearby home is foreclosed.
Foreclosed homes are often sold at fire-sale prices by lenders eager to get rid of them. Those sale prices are then used to help calculate the value of neighboring homes.
Often, foreclosed homes fall into disrepair, further damaging the value of neighboring homes.
In Taylor, Ellen Cook's neighborhood is buzzing about a $250,000 home in foreclosure that has become an eyesore, in which the homeowner took the brick pavers from the driveway and a hot tub built into the deck.
"We're already having a problem in the neighborhood with prices going down," Cook said. "We've had people try to refinance and they can't get anything because their value has dropped."
And the pain won't stop anytime soon. About 90 percent of all recent foreclosures are on loans with adjustable rates -- loans in which payments start off cheap and then rise rapidly after a predetermined length of time, typically two or three years. According to Bank of America data, the number of adjustable-rate mortgages resetting to higher rates continues to rise, with a peak nationally expected in March. About $110 billion in loans will reset to higher rates in that one month alone -- five times the dollar amount of loans that reset in January.
There is a lag between ARMs resetting to higher rates and subsequent foreclosures, as homeowners fall behind on payments. Loans that reset in March won't reach foreclosure until the summer and fall of next year.
U.S. Treasury Secretary Henry Paulson warned last week that things will get worse next year. "The nature of the problem will be significantly bigger next year because 2006 (mortgages, which will reset to higher rates in 2008) had lower underwriting standards, no amortization, and no down payments," Paulson told the Wall Street Journal.
In short, 2008 may make 2007 look like the good old days.

Sen. Schumer questions Countrywide borrowing

A U.S. regulator should scrutinize billions of dollars of loans that have helped keep troubled mortgage lender Countrywide Financial Corp (CFC.N: Quote, Profile, Research) afloat in recent months, a leading senator said on Monday.
In a letter to the regulator of the Federal Home Loan Bank system, Sen. Charles Schumer said Countrywide, the largest U.S. mortgage lender, may be abusing the program.
At the end of September, Countrywide had borrowed $51.1 billion from the Federal Home Loan Bank system -- a government-sponsored program.
"Countrywide is treating the Federal Home Loan Bank system like its personal ATM," Schumer, a New York Democrat who heads the housing panel of the Senate Banking Committee, said in the letter. "At a time when Countrywide's mortgage portfolio is deteriorating drastically, FHLB's exposure to Countrywide poses an unreasonable risk."
Schumer wrote Ronald Rosenfeld, chairman of the Federal Housing Finance Board, who oversees the system of 12 regional banks that offer financing to mortgage lenders like Washington Mutual Inc (WM.N: Quote, Profile, Research) and World Savings Bank, which was bought by Wachovia Corp. (WB.N: Quote, Profile, Research) in May 1996.
Countrywide has done its borrowing through the Atlanta Home Loan Bank. Both Rosenfeld's office and the Atlanta bank declined to comment on the Schumer letter.
The Home Loan Bank system raises money by issuing bonds guaranteed by all their members and which investors give a preferred status because of an implied government backing.
For Countrywide, the Home Loan Banks have offered a source of relatively cheap and steady funding in recent months as its own bonds are now trading at junk status.
Countrywide increased its FHLB borrowing from 28.83 billion in the three months between mid-year and the end of September. The California-based lender has put up about $62.4 billion of mortgages as collateral for its $51.1 billion in FHLB borrowing.
Shares of Countrywide closed down 10.5 percent at $8.64 on Monday. Last Wednesday the shares closed below $10 for the first time in more than five years.

Governor, 4 big lenders agree on plan to stall high mortgage rates

Four major subprime lenders promised to give a break to California homeowners who cannot afford escalating mortgage payments, under a plan announced Tuesday by the lenders and Gov. Arnold Schwarzenegger.
Countrywide, GMAC, Litton and HomeEq - which collectively service more than one quarter of subprime loans to people with poor credit - agreed to maintain the initial, lower interest rate for some subprime borrowers whose rates are scheduled to jump significantly higher. To qualify, borrowers must occupy their homes, have made their payments on time and prove they cannot afford payments with the higher interest rate.
The voluntary program is designed to stem a huge wave of foreclosures. Half a million homeowners in the state have subprime mortgages that are scheduled to jump higher within the next two years after their introductory period elapses. Such loan resets, in combination with a slumping real estate market, already have led to a record number of foreclosures across California and the nation.
"With this type of cooperation from loan servicers, we can save tens of thousands of people from being added to the foreclosure lists," the governor said in a statement. "This common-sense approach does not involve a government subsidy or bailout."
It was unclear for how long the loan servicers would freeze the interest rates.
"The word that was chosen is it's for a 'sustainable' period of time," said Mark Leyes, a spokesman for the California Department of Corporations, which oversees nondepository lending institutions. "What does that mean? The answer is, it depends. It could be two years, five years, even seven years. The idea is until the housing market recovers. At that point, housing values would be restored; equity is restored, refinancing becomes an option. But nobody knows how long that's going to be."
Larry Litton Jr., chief executive of Houston's Litton Loan Servicing, said his company plans to expand the initial interest-rate period for up to five years.
"That gives us an ability to go in five years later and if the market has recovered and the consumers can afford an increased payment, the payment can be increased at that time," he said.
Freezing the payment rate makes economic sense for the investors who own the mortgages as well as for the homeowners, Litton said. Studies have shown that each foreclosure costs lenders tens of thousands of dollars.
"Property values are falling dramatically, primarily because there are so many foreclosures already on the market in some areas," he said. "Clearly, it is not good for our investors to have the real estate back. It feels like a no-brainer for a loan servicer to keep the payment where it is, keep another piece of real estate off the market and keep the borrower in the house."
Many subprime loans have initial rates such as 8 percent or 9 percent - already a premium on the going rate for people with good credit. But what about loans with initial rates as low as 2 percent?
"I don't have any in my portfolio," Litton said.
The lenders also said they would streamline the process for determining who gets the loan modifications. Many borrowers have complained that requesting a loan modification required weeks or months of phone calls and ended in a rejection because the criteria for income and credit rating were too high. Others have said they were caught in a catch-22: They could not qualify for a loan modification until they missed some mortgage payments - which hurt their credit ratings. Studies have shown that major lenders have modified only a small percentage of mortgages.
The companies also agreed to provide regular reports to the Department of Corporations on their efforts to reach out to consumers and on how many loan modifications actually occur.
"Overall I am extremely pleased that the issue of foreclosures is squarely on the governor's radar screen and that he seems to have extracted some important commitments from some very significant loan servicers here in California," said Paul Leonard, California director for the Center for Responsible Lending, an advocacy group. "That said, the devil is in the details. The monitoring and reporting on the process is critically important."
-- A federal regulator proposes an incentive plan
for loan servicers who agree to modify lending terms to avoid default.
Who qualifies
If you have a mortgage through Countrywide, GMAC, Litton or HomeEq, you might qualify to have your introductory interest rate temporarily frozen. To get help, borrowers must occupy their homes, have made their payments on time and prove they cannot afford the loan's new rate. If this fits your situation, contact your loan servicer to apply.

Upside Down

According to Zillow’s Q3 2007 Home Value Report released today, as of September 30th, 15.6% of homeowners who purchased a home in the last year owe more on their mortgage than the current value of the property.
The data also revealed that 17.5% of homeowners nationwide who purchased a home two years ago were stuck with negative equity.
That compares to a mere 1.8% of homeowners experiencing negative equity who purchased homes five years ago.
The rise in negative equity comes after home values declined for the fourth straight quarter, experiencing a 5.7% drop year-over-year, the largest decline in over a decade, according to Zillow.
“The decline in home values picked up steam in the third quarter, posting the largest nationwide year-over-year drop in more than a decade,” said Stan Humphries, Zillow’s vice president of data and analytics.
“Continuing depreciation coupled with the downward trend in the size of mortgage down payments has left many new home owners ‘upside down’ on their mortgage, meaning they owe more than the current value of their home.
Areas hit worst include California’s Central Valley (Stockton and Merced), Las Vegas, and parts of Florida which have seen negative equity rates up to five times the national median thanks to double-digit depreciation.
But overall, homeowners who put down a median down payment of 10% in the last two years now have median equity of 13%.
However, it’s a far cry from the 9.4 percent annualized growth rate many homeowners enjoyed over the past five years.
Some areas bucked the downward trend, including housing markets in the Pacific Northwest and Honolulu, Hawaii.

How Many More Shoes are Going To Drop?

Nov. 20 -- They dubbed it ``The Survivors' Conference.'' In early November, 2,000 people who handle asset- backed securities for a living crowded into a ballroom at the JW Marriott hotel in Orlando, Florida, just 3 miles from Disney World, to hear speaker after speaker explain why 2008 may be their worst year ever. The subprime crisis, which has claimed the jobs of three chief executive officers and prompted more than $45 billion in writedowns at the world's biggest banks, may end up spilling into 2009. ``These events tend to become deeper and play out longer than most people initially expect,'' says Michael Mayo, an analyst who covers securities firms at Deutsche Bank AG in New York. ``This is one of the slowest-moving train wrecks we've seen.'' The tumbling U.S. housing market will continue to inflict the damage. Mortgage-backed securities and collateralized debt obligations containing those securities are falling in price and won't find their footing anytime soon. That's because most of the subprime mortgages, which provide collateral for $800 billion in securities, have yet to go bad, says Christopher Whalen of Hawthorne, California-based Institutional Risk Analytics.
``The collateral is not yet problematic,'' Whalen says. ``That's the next big shoe to drop.''
Housing Starts -Whalen says defaults will soar as the rates of low-interest ``teaser'' mortgages held by borrowers with poor credit move up. At the end of August, about $46 billion in subprime loans, representing 225,000 homes, had defaulted, according to Credit Suisse Group. The number will more than triple to $143 billion by the middle of 2009, the bank forecasts. Total subprime loan defaults will top out at about $270 billion, or 1.52 million homes, in 2010 or later.
Home builders are also facing headwinds. U.S. housing starts rose in October as an increase in condominium projects offset the weakest construction of single-family homes in 16 years. Builders broke ground on 1.229 million homes at an annual rate last month, up 3 percent from September, the Commerce Department said in Washington today. Building permits, a gauge of future construction, fell 6.6 percent to a 1.178 pace, the lowest since 1993.
Companies can't trim their inventories because sales of single-family homes are declining as fast as construction, suggesting the real-estate recession will linger into 2008.
``Until housing prices bottom out, the writedowns won't stop,'' says Peter Kovalski, who helps manage more than $12 billion at Purchase, New York-based Alpine Woods Investments. ``The Street wants things right away, but it doesn't work that way.''
Level 3 Writedowns
Banks' writedowns include assets that they classify as level 3, an accounting category which indicates the holdings are so illiquid that they can only be priced using the firm's own valuation models.
Goldman Sachs Group Inc.'s level 3 assets rose by 33 percent in the third quarter of 2007 from the prior period because it was stuck with loans when the leveraged buyout market froze. Level 3 assets accounted for 6.9 percent of the firm's $1.05 trillion total at the end of August, according to a government filing. Citigroup Inc. classified 5.7 percent of its assets as level 3 on Sept. 30. The total global loss from the subprime mess, Deutsche Bank's Mayo said on Nov. 12, may reach $400 billion. Rating companies, under fire from investors for applying their highest ratings to CDOs that included securities backed by subprime loans, are downgrading the debt. Late last month, Moody's Investors Service cut ratings on CDOs tied to $33 billion of subprime mortgage securities.
Citigroup Plummets
The ratings firm also threatened to downgrade structured investment vehicles with CDOs managed by Citigroup and HSBC Holdings Plc after two SIVs defaulted in October. Moody's says it assumes the SIVs are unwinding their assets, selling at distressed prices, to refinance their maturing commercial paper. The so-called Super SIV, a fund set up by banks at the urging of the U.S. Treasury to buy the highest-rated securities, will seek to prevent a meltdown of the 30 SIVs globally holding $320 billion as of Oct. 5.
Wall Street profits are also plunging in the fourth quarter. Citigroup, the second-largest CDO issuer in the first half of 2007, may post a loss in the final period, according to the average estimate of 23 analysts compiled by Bloomberg News. That's after the bank reported a writedown of as much as $11 billion, which cost CEO Charles Prince his job. Merrill Lynch & Co., which replaced CEO Stan O'Neal with New York Stock Exchange head John Thain on Nov. 14, may report that profit fell 49 percent in the fourth quarter. Bear Stearns Cos. also may have a loss.
24,000 Job Cuts
At the five biggest securities firms -- Lehman Brothers Holdings Inc., Morgan Stanley, Bear Stearns, Goldman Sachs and Merrill Lynch -- earnings are expected to fall 8.3 percent in 2007 from a record $30.6 billion in '06, according to analyst estimates.
Lower profits mean more firings. Bank of America Corp., JPMorgan Chase & Co., Bear Stearns, Citigroup, Lehman Brothers and Morgan Stanley announced more than 24,000 job cuts in the first 10 months of 2007. Gustavo Dolfino, president of New York- based executive search firm Whiterock Group LLC, says he expects the firms to fire another 5,000-10,000 people in '07.
The subprime debacle may echo through the economy the way the popping of the Internet bubble did -- hurting consumers and growth years later. The 39 percent drop in the Nasdaq Composite Index in 2000 eventually led people to yank money from their mutual funds, Mayo says. The U.S. economy fell into recession in March '01.
Economic Slowdown
At the conference in Orlando, investors concerned about another recession were in no mood for the usual festivities. The party thrown by Bear Stearns -- the first Wall Street bank to have a subprime blowup -- was almost empty at 9 p.m., with 10 people commiserating over beer and calypso music.
Bose George, an analyst at Keefe, Bruyette & Woods Inc. attending the conference for the first time, has an equally glum outlook on the already slowing U.S. economy. He says a decline in home equity loans will curtail consumer spending.
``Credit is a huge driver of growth, and it's hard to see how this isn't going to have an impact on the economy,'' George says. ``Things are going to get worse.''
There's one bright spot for George: He'll have more time for research. Six of the 15 companies he used to cover, including American Home Mortgage Investment Corp. and New Century Financial Corp., have gone out of business.

Cleveland Rocks

If you had a foreclosure and need help finding housing in the Sacramento to Chico areas I can help.
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Foreclosures may have reached a crisis point in Cleveland, but grass-roots efforts are sending some relief to troubled homeowners.
Counselors from more than a dozen non-profit community organizations are working with delinquent borrowers and lenders to help people keep their homes, and they say it's getting easier. It's a growth industry funded by charitable foundations, individual contributors, the local government and the lending industry itself. Cleveland Housing Network (CHN) hosts group counseling sessions of about 30 people three times a week, up from one a week a year ago. Another organization, the East Side Organizing Project (ESOP), has gone from two foreclosure counselors to six during the past year. They say their relationships with lenders, once adversarial, have grown more co-operative. The kinds of loan workouts available are changing and improving, according to Mark Seifert, executive director of ESOP. In the past, he said, lenders did little more than toss crumbs. "As little as six months ago," he said, "90 percent of workouts lenders offered were forbearance agreements," which give a borrower extra time to clear up missed payments, but they postpone problems without solving them.
"We'd see the same people six months later," said Seifert.
Where Cleveland went wrong
Now lenders are offering more comprehensive programs, like refinancing subprime adjustable rate mortgages (ARMs) into fixed-rates, lowering rates or balances or both.
Many lenders are also providing counselors with lists of borrowers facing ARM resets. The agencies themselves then mail out warnings to borrowers, who respond to them better than they would from lenders. said Seifert, "We did this back in March for [mortgage servicer] Ocwen Financial, sending out 100 letters; 30 people showed up. We did 25 workouts, mostly switching borrowers to fixed rates from ARMs." A significant part of putting borrowers back on track is teaching financial responsibility. "They [often] have lifestyle issues," said Seifert. "Do you really need five cell phones?"
One recent ESOP client was being evicted, even though she had found the cash to make back payments. Two counselors, James Jones and Samantha Williams, went to her house to help. In her driveway sat two big motorboats and an expensive minivan. That's why one refi program, established by local bank Third Federal Savings & Loan, requires six weeks of financial education. It then switches borrowers from ARMs into reasonable fixed-rate loans. Of several dozen people ESOP enrolled there, only one later re-defaulted, according to Seifert.
For the lenders, work-outs are self-protection, Seifert said, "We're getting more successful solutions because lenders are scared." It's cheaper for them to work out a troubled mortgage. A foreclosure costs more than $50,000 on average, according to the Center for Responsible Lending, citing a Joint Economic Committee Report. But not all lenders have stepped up, according to Jeanne Morton, CHN's director. "Some look to make something from the situation, only offering refis with full charges and fees attached," she said. ESOP, according to Seifert, had been having little luck with Countrywide Financial, the nation's biggest mortgage lender. His counselors had suggested 26 work-outs from June to November, but Countrywide (Charts, Fortune 500) had not approved a single one, he said. But that's changed. This week, Countrywide came up with 11 workouts for ESOP's clients. Seifert attributed the change of heart to increased media attention as well as a new contact there, who has a background in non-profit community organization. Positive outcomes have also increased, agree counselors, because media and government spotlights have made homeowners more aware of looming problems and that getting help early is essential. ESOP counselor Samantha Williams said. "Borrowers are more proactive," coming in before they fall behind. About 30 percent to 40 percent of her clients now are current with payments, up from almost none in the past. Counselors may be getting more loan workouts, but it's still not enough to stop Cleveland's foreclosure meltdown. Last quarter, more than 16,000 properties were in some stage of default, according to RealtyTrac. And the number is likely to grow before it slows down. Mortgage data provider First American CoreLogic ranks Cleveland as the nation's sixth riskiest major market.
"People still tend to wait until it's too late," said Mark Wiseman, who directs the Cuyahoga County Foreclosure Prevention Program. "A paralysis takes hold."

$2 surcharge hits a royal flush...

"I'll pay $2 bucks to send guys like this away - wouldn't you?"

In the past, Real Estate and Mortgage Fraud cases in one central California town might have gone undetected or sent to federal authorities, but thanks to a two-year-old Real Estate Fraud Unit funded by a $2 surcharge on every real estate transaction recorded, Modesto, California, is cracking down on the bad guys at a higher rate than ever before. Case in point: The Stanislaus County district attorney’s office recently filed a 68-count criminal complaint against three real estate agents and seven others.
The three are accused of stealing more than $2 million from lenders by filing false documents with Stanislaus County’s clerk-recorder’s office, indicating that loans on three properties had been paid–all so straw buyers could secure new loans, then cash out with the illegally obtained proceeds.

Real estate agent Eric Charles Braun, 29, of Modesto is charged with 63 felonies. He is accused of masterminding the scheme with Noah Yates, who handled the paperwork while Braun did the legwork.

Real estate agent Noah Adam Yates, 29, of Modesto is charged with 53 felonies. He is accused of having a home full of computers used to create fraudulent documents and a Web site that said people legally can eliminate their mortgages.

Jearod Miles Robinson, 34, of Ceres is charged with 18 felonies. He is accused of acting as a straw buyer in a mortgage elimination scheme run by his cousin, Braun, who never paid Robinson $100,000 as promised.

Real estate agent Doug Eugene Wallick, 32, of Waterford is charged with 15 felonies. He is accused of using a Modesto home he owned in a mortgage elimination scheme with Yates and Braun.

Darin Eric Abell, 41, of Turlock is charged with nine felonies. He and his wife are accused of using a Turlock home he owned in a mortgage elimination scheme with Braun and Yates.

Dawna Lea Abell, 38, of Turlock is charged with nine felonies. She and her husband are accused of using a Turlock home he owned in a mortgage elimination scheme with Braun and Yates.

Elizabeth Marcela Ayhens, 24, of Stockton is charged with two felonies. She is accused of forging names on real estate documents and receiving $1,000 from Yates.

Nicholas Matthew Ayhens, 24, of Modesto is charged with two felonies. He is accused of using forged names on real estate documents and receiving $20,000 from Yates.

Arnold Vergara Rodriguez, 32, of Modesto is charged with two felonies. He is accused of receiving $50,000 for referring Braun to a lender who was targeted in a fraudulent scheme.

Brian William Heytz, 32, of Ceres is charged with one felony. He is accused of attempting to defraud a lender by making false representations while trying to purchase a home from Wallick and Yates.

California October 2007 Home Sales

November 15, 2007
A total of 24,832 new and resale houses and condos were sold statewide last month. That's up 5.6 percent from 24,460 for September, and down 40.9 percent from 43,720 for October 2006. Last month's sales made for the slowest October in DataQuick's records, which go back to 1988. On a year-over-year basis, sales have declined the last 25 months.
The median price paid for a home last month was $424,000, down 1.4 percent from $430,000 for the month before, and down 9.2 percent from $467,000 for October a year ago. The median peaked last March/April/May at $484,000.
Price declines are severe in areas that absorbed spillover activity during the frenzy like the Central Valley and Riverside County. Prices in core metro areas are are off by a few percent.
The typical mortgage payment that home buyers committed themselves to paying last month was $2,016. That was down from $2,046 in September, and down from $2,206 for October a year ago. Adjusted for inflation, mortgage payments are 4.4 percent below the spring 1989 peak of the prior real estate cycle. They are 17.5 percent below the current cycle's peak in June last year.
DataQuick, a subsidiary of Vancouver-based MacDonald Dettwiler and Associates, monitors real estate activity nationwide and provides information to consumers, educational institutions, public agencies, lending institutions, title companies and industry analysts. The numbers cover all sales, new and resale, houses and condos.
Indicators of market distress continue to move in different directions. Foreclosure activity is at record levels, financing with adjustable-rate mortgages and with multiple mortgages have dropped sharply. Down payment sizes and flipping rates are stable, non-owner occupied buying activity is edging up, DataQuick reported.

Organization for Economic Co Operation and Development

OECD Says the Full Effect of the Sub-Prime Mess is Still in Front of UsThe following from Yahoo basically states that the full effect of the sub-prime problems are still in front of us, both for the banks and the consumer. The full global impact of the U.S. subprime mortgage market crisis has yet to be felt although more information is needed to determine its full extent, OECD Chief Angel Gurria said in a speech in Budapest on Thursday. "I don't think we have seen the end of the manifestations of the problem. I think we need more information about the impacts," Gurria, Secretary-General of the Organisation for Economic Co-operation and Development, said.He said the greatest impact of the recent turmoil was on confidence in the banking sector, which has not returned to normal, and said the crisis had accelerated an ongoing slowdown in the pace of global growth."(The) greatest impact of subprime is on the confidence level, and multiplication of the impact on the whole financial system, which stopped giving loans to each other and to normalize this would take time," Gurria said.For ordinary consumers, the impact will be felt next year."The time of reset of interest rates is going to be ... in April-June 2008. This is when interest rates are going to increase for many of the mortgage borrowers, we have to see how the system is going to proceed with that," Gurria said.Markets were first gripped by a credit crunch in August when interbank lending dried up as banks realized they did not know which of them was dangerously exposed to shaky U.S. home loans.With precarious U.S. mortgages bundled up into complex financial products and sold on around the globe, uncertainty lingers about where the exposure lies although a raft of bank results reports have shed some light.

Prepared Remarks for Richard F. Syron (Chairman & CEO, Freddie Mac)

To a Conference on the Liquidity Crunch At the UCLA - Anderson School of Management Los Angeles, CaliforniaNovember 13, 2007


Thank you, Stuart [Gabriel]. It's good to be here – and only in part because my daughter is a Ph.D. candidate in the Cal system. I particularly want to thank Richard [Roll] for organizing this timely forum and inviting me. As soon as my assistant told me who the invitation was from, I asked just one question: "Which flight can you get me on?"
That’s all the Irish blarney you’ll hear from me today. I will be as candid as I can, given the constraints facing a highly-regulated entity that’s always under the political microscope.
These have been tough times in the mortgage industry and volatile times in the broader financial markets. Markets are better than anything else but they are not perfectly efficient. We face a situation where the market mispriced risk for a considerable period, and allowed a lot more risk to end up in a lot more places than it should.
While some aspects of the credit crunch have eased, a lot of damage has been done and many markets are still fragile. The spread between jumbo and conforming mortgages blew out to four times its typical quarter point; now it’s fallen to about three or two times the norm. But that’s still unacceptable – especially in high cost states like California, New York and where my accent is from, Massachusetts. Beyond that, the subprime issue ended up being the straw that broke the camel’s back on credit spreads that had been too tight. Investors remain leery of asset-backed securities because they don’t know if subprime dangers might be lurking there. The asset-backed commercial paper market became dysfunctional. The only part of the mortgage space working relatively normally is the conventional conforming market. That’s primarily the space in which Freddie Mac and Fannie Mae – both government-sponsored enterprises, or GSEs – pursue our mission of providing liquidity and stability to the markets. The spillover from all of this has been considerable, of course. Within the mortgage industry itself, roughly a quarter of the former top 25 lenders have been forced out of business, were acquired by other lenders, or have shut down their subprime operations.
In the broader economy, employment and consumer confidence have both been affected. GDP statistics show that the downturn in residential investment accelerated in the third quarter, subtracting a full percentage point from national GDP growth. I fear that drag may increase. Declines in home values in the coming year will reduce housing wealth and will likely impede consumer spending. Of course, the regional impacts are uneven, with high-cost areas like California – and Los Angeles in particular – being particularly exposed. According to the California Association of Realtors, sales of single-family homes are down 50 percent from a year ago. Various measures of house prices in the Los Angeles market show values significantly down from a year ago – and the decline is likely to continue. So those are among the many symptoms of a serious liquidity crunch. What were its causes?
One root cause has been widely noted: tight credit spreads due to a global glut of savings. But a major contributing factor has been much less remarked upon – the role of China. For the first time in modern history, the world’s largest emerging economy was a net exporter of both capital and, in effect, of labor.
A second cause was advances in technology and financial engineering that de-institutionalized the mortgage market. On the whole, these new tools and techniques have been a good thing. But here they also separated the origination decision from the investment decision. So in this instance, combined with other factors, they were part of some very bad outcomes – and also have complicated resolving the situation.
A third cause involved the age-old balance between fear and greed. After periods of relative stability, greed often prevails. It got to the point where some mortgage product could be originated for almost any applicant. Many of these mortgages had risky features, including large payment shocks upon reset. Essentially, if you made a mortgage, somebody would buy it.
All right, those were some of the key causes. What are some useful solutions?
It's important to acknowledge there is no silver bullet. Even if the entire system works perfectly going forward – including the political and regulatory components – the fact is we have a substantial housing inventory overhang, and it will need considerable time to be absorbed.
Still, there are useful things we can do. I’ll talk mostly from the perspective of the GSEs. Not because we are a panacea or a white knight or any such thing here. We've had our own problems but we must be part of the solution. I doubt there’s much disagreement about this.
Here’s some of what Freddie Mac has done to be part of the solution.
First, we raised standards – early. In February, we were the first investor to announce tightened lending standards to limit payment shock for subprime borrowers, and help ensure these borrowers can afford and keep their homes. The only subprime securities we buy today that are backed by short-term adjustable-rate mortgages have been underwritten to a fully-indexed, fully-amortizing level. This is consistent with a number of our other efforts to combat predatory lending and help families not only to buy homes, but to keep them.
Next, in April, we committed to purchase an incremental $20 billion in more consumer-friendly mortgages that will provide better choices for subprime borrowers. We began delivering on that commitment this summer. I’ll return to this in a few minutes.
We are also working hard to ensure there is no disruption in the supply of mortgage funds. For example, in August we offered needed support to the Alt-A market by providing a 90-day forward purchase commitment to certain lenders, which allows borrowers to "lock in" their rate.
Finally, we have consistently been at the forefront of efforts to help borrowers avoid foreclosure. This year, through September, we helped more than 33,000 families find alternatives to foreclosure that keep them in their homes. That brings our total of such workouts since the beginning of 2004 to almost 200,000.3
In the course of our efforts on the subprime problem, we've developed a greater understanding of this former backwater of the mortgage market. It can be roughly divided into three parts. The top group of subprime loans might have been eligible for prime credit but ended up in subprime. It may well be possible to "upstream" or refinance these into many of the prime or FHA loans available today. We're also finding a bigger role for the GSEs buying whole loans of this kind.
A second group of loans probably are legitimately in subprime, but could benefit from better subprime products – for example, loans with reasonable reset terms and better underwriting standards.
Finally, there’s the bottom group of subprime loans that may not have been repayable in any reasonable scenario unless house prices continued to escalate. Price inflation can bail out a lot of bad underwriting. For people in this bottom group, it may be better to be renters rather than homeowners at this point in the cycle. That used to be the norm. Meanwhile, issues of moral hazard aside, it’s in all of our interests to see this transition occur with as little harm to neighborhoods as possible.
Part of the problem is that subprime loans were doing a lot of work for which they were never intended. We must remember, subprime traditionally has been a niche market. In the mid-1990s, according to a Bear Stearns study, only 2 percent of subprime loans were for home purchase; and even by 2001, subprime comprised only about 5 percent of the overall market.4 Subprime historically was kind of an emergency bridge loan, equity product, primarily for refinance purposes. Only recently did it become a product for ordinary homebuyers and even investors to buy homes, such that from 2004 through 2006, almost half of subprime loans were for home purchase – and they accounted for about a fifth of mortgage originations overall.5
That kind of mission creep and outsized growth should tell us something.
The harsh reality is that as a society, we must stop looking almost exclusively to housing finance to solve the problem of housing affordability. When you consider the panoply of issues affecting the cost of housing – from supply side factors such as zoning and permitting to transportation to income inequality – it's very hard to conclude that the cost of money in the world’s most developed mortgage market is the root cause why we lack enough affordable housing. To the contrary, as Daniel Patrick Moynihan said, the basic problem with poor people is, they don’t have enough money.
I hope Americans will one day look back on the current downturn and remember that when housing is unaffordable, the answer can not lie solely in mortgage finance – adding ever more exotic mortgage products, eliminating tried and true underwriting standards, raising the risk of payment shocks.
Now, all of Freddie Mac's special efforts I mentioned a minute ago are a good thing and they are helping to cushion the negative effects on borrowers and communities. But I would argue that over time, it is the GSEs' everyday activities to carry out our mission that are making the greatest difference. And I would further argue that this is no accident – because this is the very kind of situation for which we were designed.
One reason Freddie Mac and Fannie Mae were created was to mitigate the impacts on the housing finance system of a liquidity crunch like this one. Clearly, the market is experiencing a flight to quality. At times like these, the GSEs provide stability to the housing sector by providing funds counter-cyclically to lenders.
That means that at the point in the business cycle when economic activity is contracting, Freddie Mac and Fannie Mae should increase their relative provision of funds to the mortgage market, and vice versa. In contrast, other mortgage investors make credit available pro-cyclically, such that fewer funds are available when they are most needed – as during a housing downturn. By acting counter to the business cycle, Freddie Mac and Fannie Mae should help reduce the depth of a housing recession and support credit flows during an expansion on an "as needed" basis.6
The various parts of our business work together to do this. Critics of our retained portfolio ignore the fact that it allows us to manage overall mortgage risk, not just mortgage credit risk. This lets us bring our skills at prepayment and interest rate risk management to bear, as well as our low funding costs. The retained portfolio lowers our cost of capital and allows us to keep mortgage rates relatively low, as suggested in some of Stuart Gabriel's research.7 It also significantly broadens our investor base and enables us to insource U.S housing finance from abroad – because GSE debt is more broadly appealing to foreign investors than mortgage backed securities or whole loans, both of which entail prepayment risk.
Equally important, the retained portfolio lets us diversify our risk exposure, especially in periods of great stress – like now.
A key benefit of the retained portfolio is that it helps us complete markets, as Professor Roll detailed in the Journal of Financial Services Research.8 And it is fundamentally a market instrument, allowing us to respond nimbly to market developments.
There seems to be a misperception that the GSEs' operations and our retained portfolios are infinitely elastic to political and policy demands. But the fact is, we are also shareholder-owned corporations, and there are points beyond which our business model simply cannot work on a sustainable basis. The retained portfolio is a market instrument that must continue to answer to market dictates, not solely political dictates, if we are to continue performing our mission.
And how is that mission going, in terms of the subprime crisis? In fulfillment of the $20 billion commitment I mentioned earlier, by the end of this year we will have purchased over $30 billion of loans from credit-challenged borrowers, many of whom likely were in the subprime market in the past. This $30 billion figure includes not only purchases into our SafeStep subprime product, but also refinancing into our standard offerings, such as our targeted affordable offering, Home Possible.
This doesn't solve the whole subprime problem – not by a long stretch – and our efforts will continue. But it does represent meaningful progress. And the 33,000 workouts instead of foreclosures this year that I mentioned are helping the overall housing situation as well.
I want to mention one other helpful aspect of Freddie Mac's routine functioning these days – namely, our securitization activities.
By providing a corporate guarantee, Freddie Mac's mortgage backed security provides an active, useful guarantee very different than a private label, asset-backed security. The private label instrument in today’s market seems like a structured security having almost the characteristics of a story bond. Today, people aren't buying the story – or if there's a story involved they don’t even want to hear it.
So in this time of uncertainty, by providing a solid corporate guarantee, our securitization activities are in themselves a very useful thing. We've had to bear some added credit risk to be as active as we’ve been during this period. But it has helped the conforming market remain orderly, and it’s been the right thing to do for our mission.
At a time of elevated risk like this, a liquidity premium is to be expected. And of course, we don't want to suppress the market price for risk. One healthy aspect of this liquidity crunch is that it's been part of a widespread reassessment of the pricing of risk. Where to draw the line is a judgment call. But again, no one wants the GSEs to play any role in artificially reversing or suppressing the price of risk.
I want to mention loan limits, because this is a topic especially germane for this forum. There’s been a great deal of discussion back in Washington of letting the GSEs buy loans larger than the current limit of $417,000.
Again, there's obviously no move that will solve everything. But the basic principle is unassailable. At ordinary times, the spread between conventional and jumbo loans is about a quarter point. As Professor Roll has written, that’s one sign of the efficiency of the GSE part of the market. At the worst of the recent crisis, the spread quadrupled to a record of about 100 basis points; now it’s closer to double, at 50 to 60 basis points.
It makes no sense to assume that housing costs are the same throughout the contiguous United States. For example, in a high-cost state like California, the median home price in August was more than $150,000 above the conforming loan limit.9
What this means is simple. The housing crunch here will be worse than it needs to be, because low-cost GSE financing will be less available here.
I’ll end with a brief word on the mortgage market's direction.
The market is coming back today to the long-term, fixed rate, prepayable mortgage – what I call "the American Mortgage." And I must say, I think that's a good thing, and not only because it’s what the GSEs finance best. This kind of lending has a host of advantages for families and our nation. For example, recent research for the UK Treasury and the IMF shows that such fixed-rate lending makes a nation’s economy less prone to boom and bust.10
The GSEs are a key reason why the U.S. is the only major economy where this type of mortgage is prevalent. And it remains the revealed preference of a high proportion of American families. Together with access to second mortgages, it provides much of what consumers need to make their life cycle optimization decisions. So I find the fact that borrowers and lenders have moved back in this direction to be a heartening development.
In closing, I'll repeat once more that Freddie Mac is not the whole solution. We've been far from perfect and we have a lot left to do. But given the serious liquidity and credit concerns still disturbing the markets today, we need to put the past behind us and all focus on what each of us, including the GSEs, can do to stabilize the markets and give Americans the future they deserve.

Top Foreclosure Markets

RealtyTrac released its Q3 2007 Metropolitan Foreclosure Market Report, which revealed that Stockton, CA, Detroit, MI, and San Bernardino, CA had the highest foreclosure rates among the nation’s 100 largest metropolitan areas during the quarter.
Stockton, CA reported one foreclosure filing per 31 households during the third quarter, up more than 30 percent from the previous quarter, with 7,116 foreclosure filings on 4,409 properties reported. Detroit, MI chalked a foreclosure rate of 1 for every 33 households, more than twice the filings it reported in the second quarter, with 25,708 foreclosure filings on 16,079 properties. San Bernardino, CA had the third highest metro foreclosure rate in the U.S., with one foreclosure for every 43 households, up more than 30 percent from the prior quarter, with 31,661 foreclosure filings 20,664. Rounding out the top 10 metro foreclosure rates were Fort Lauderdale, FL.; Las Vegas, NV; Sacramento, CA.; Cleveland, OH; Miami, FL; Bakersfield, CA.; and Oakland, CA. California cities accounted for seven of the top 25 metro foreclosure rates, including five of the top 10, while Florida and Ohio each accounted for five of the top 25 spots.
“Although cities in just three states — California, Ohio and Florida — accounted for more than two-thirds of the top 25 metro foreclosure rates, increasing foreclosure activity was not limited to just a few hot spots,” said James J. Saccacio, chief executive officer of RealtyTrac.
“In fact, 77 out of the top 100 metro areas reported more foreclosure filings in the third quarter than they had in the previous quarter. Still, there continue to be pockets of the country — most noticeably metro areas in the Carolinas, Virginia and Texas — that have thus far dodged the foreclosure bullet.” It should be noted that RealtyTrac counts foreclosure filings in all three phases of foreclosure, including multiple filings on single properties, with many not actually resulting in foreclosure.

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See No Evil....Rear View Mirrors...Who had the wheel though....?

Mortgage Loan Losses Pose Risk of Systemic Shock

Nov. 13 -- There's a greater than 50 percent probability that the financial system ``will come to a grinding halt'' because of losses from mortgages, Gregory Peters, head of credit strategy at Morgan Stanley, said.
The world's biggest banks and securities firms have written down at least $45 billion in the value of assets linked to subprime mortgages for the third quarter after borrowers with poor credit histories failed to keep up with payments. Structured investment vehicles have defaulted on debt, forcing lenders including Legg Mason Inc. and SunTrust Banks Inc. to prop up their money-market funds to cushion them from possible losses.
``You have the SIVs, you have the conduits, you have the money-market funds, you have future losses still in the dealer's balance sheet in the banks,'' Peters said in an interview in New York. ``That's all toppling at once.''
The risk of systemic shock from the current subprime meltdown is quite large in the near term, Peters said. ``It's an overarching concern that we have,'' he said.
Losses stemming from the subprime mortgages have caused a seizure of a lot of other markets, especially the securitization market, Peters said.
The U.S. asset-backed commercial paper market had its biggest weekly drop in two months in the week ended Nov. 7, according to a Federal Reserve report. Debt maturing in 270 days or less and backed by mortgages, credit-card loans and other assets fell $29.5 billion, or 3.4 percent, to a seasonally adjusted $845.2 billion.
Sales of U.S. corporate bonds slowed to $11.1 billion last week, the lowest in two months, according to data compiled by Bloomberg.
``While the near-term concern is the systemic shock of the subprime-related losses, the medium- and long-term concern is the impact on the average consumer,'' Peters said. ``The ultimate irony here is that the U.S. consumer now needs readily available capital more easily than ever, but they're going to have the most difficult time getting it.''

Goldman Sachs on The California Market

October 21, 2007 Americas: Specialty Finance: Mortgage Finance
Goldman Sachs Global Investment Research 1
October 21, 2007
Americas: Specialty Finance: Mortgage Finance
Californian home prices are over-valued by 35-40%
House prices are significantly over-valued in California
Our house price model indicates that Californian homes are 35-40% above
the price range implied by current and forecast economic conditions
(compared to 13-14% over-valuation nationally). As of August the median
house price in California was $589K, but economic conditions support
prices between $350-380K; material price declines are likely, in our view.
From 1985 to 2003, 82% of quarterly variation in the OFHEO index for
Californian home prices could be explained by two factors (state-level
disposable income and interest rates); but this relationship broke down in
2004. We believe that sales of “affordability products” (e.g., subprime,
option ARMs) – which spiked in 2004 – drove Californian home prices
above levels supported by economic conditions; now that the secondary
market for these products has evaporated, we expect home prices to
return to normalized levels (as prices fall and disposable incomes grow).
Countrywide and WaMu have high exposure to California
Countrywide and WaMu are disproportionately exposed to Californian
housing risk; in contrast, Fannie Mae and Freddie Mac are under-exposed.
We estimate that California represents 25% of the U.S. mortgage market.
This compares with our estimate of the proportion of mortgage portfolios
backed by homes in California held by Countrywide and WaMu (45-50%
each) versus Fannie and Freddie (15% each). Limited GSE exposure is due
to a conforming loan limit below the median house price in California.
Californian home prices on the cusp of an abyss?
House prices in California have proven surprisingly resilient (e.g., up 2%
year-on-year last August), given the severe curtailment of credit
availability and rising unemployment. However, we believe that a
downturn is imminent, with sales volumes down 52% from the peak (in
January 2005) and inventory (11.8 months) up 100% since last year.
House price depreciation and credit deterioration go hand-in-hand
We anticipate residential mortgage credit deterioration to follow house
price declines in California. Presently, credit quality (in absolute terms) is
better in California versus the national average, but the rate of
deterioration is much worse. For instance, in 2Q07 delinquency rates for
prime ARMs and subprime ARMs rose 92% and 73% year-on-year
respectively in California, versus 53% and 38% nationally.
OUR CALIFORNIAN HOUSE PRICE MODEL
1. From 1985 to 2003, 82% of quarterly variation in the
OFHEO index of Californian home prices could be explained
by only two economic factors: state-level disposable
income and interest rates.
2. This relationship broke down in 2004; sales of
“affordability products” (e.g., subprime, option ARMs,
home equity loans), which spiked in 2004, drove Californian
home prices well-above levels supported by economic
conditions, in our view.
3. Now that the secondary market for these affordability
products has all but disappeared, we expect home prices to
return to normalized levels (i.e. price levels implied by
current and forecast disposable income in California as well
as U.S. ten-year treasury yields); this implies a 35-40% fall.
RELATED RESEARCH
WM (Neutral): “3Q07: A decidedly pessimistic outlook for
mortgage credit trends”, published October 18, 2007.
CFC (Sell): “Anticipating significant write-downs in
3Q2007”, published October 16, 2007.
“Chaos in context: assessing proportionality and adjusting
targets”, published August 21, 2007.
CFC (Sell): “Californian mortgage trends present a risk for
Countrywide”, published April 20, 2007.
CFC (Sell): “Legislative initiatives for the mortgage
predicament look inevitable”, published March 26, 2007.
“Deteriorating subprime fundamentals as a regulatory
catalyst”, published February 9, 2007.
CFC (Sell): “Credit deteriorating, non-prime gain on sale
margins unsustainable”, published January 31, 2007.
“A two-stage hangover for mortgage stocks”, published
November 16, 2007.
James Fotheringham
(212) 902-1913 james.fotheringham@gs.com Goldman, Sachs & Co.
Daniel Zimmerman, CFA
(212) 357-6191 daniel.zimmerman@gs.com Goldman, Sachs & Co.
Monica Gabel
(917) 343-3195 monica.gabel@gs.com Goldman, Sachs & Co.
The Goldman Sachs Group, Inc. does and seeks to do business with
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the objectivity of this report. Investors should consider this report as
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The Goldman Sachs Group, Inc. Global Investment Research
October 21, 2007 Americas: Specialty Finance: Mortgage Finance
Goldman Sachs Global Investment Research 2
Californian house prices are not supported by economic conditions
1. Our Californian house price model
From 1985 to 2003, 82% of quarterly variation in the OFHEO index of Californian home
prices could be explained by only two economic factors: disposable income (for the state
of California) and interest rates (U.S. ten-year treasury yield); see Exhibit 1.
Exhibit 1: House prices in California are 35%-40% over-valued, relative to forecast economic conditions
Our hitherto highly-predictive model broke in 2004, when sales of “affordability products” (e.g., subprime, option ARMs, home
equity) spiked as a proportion of total mortgage originations.
OFHEO home price index for California
Quarterly since 1Q1985
Disposable Income / Long-term rates
Total disposable income in California as a multiple of the US 10-year treasury yield ($trillion, quarterly since 1Q1985)
100
200
300
400
500
600
700
$5 $10 $15 $20 $25 $30 $35
2Q07
1Q07
2Q06 3Q06 4Q06
1Q06
4Q05
3Q05
2Q05
1Q05
4Q04
3Q04
2Q04
1Q04
R2=82%
GS Economic Forecasts
Disposable income / Long-term rates
4Q2007-4Q2008
From $28 to $31
Subsequent index level = 399.5
Corresponds to $366,790
Current Index level = 636.3
Current Median House Price = $588,970
Source: OFHEO, FactSet, Goldman Sachs Economic forecasts, Goldman Sachs Research estimates.
2. What happened in 2004?
The relationship between Californian house prices and disposable income as a multiple of
long rates broke down in 2004; we believe that aggressive sales of “affordability products”
(e.g., subprime, option ARMs, home equity loans), which spiked in 2004 (see Exhibit 2),
drove Californian home prices well-above levels supported by economic conditions.
October 21, 2007 Americas: Specialty Finance: Mortgage Finance
Goldman Sachs Global Investment Research 3
Exhibit 2: What happened in 2004?
Sales of “affordability products” – subprime, Alt A, home equity loans – as a proportion of total
mortgage originations spiked at the start of 2004.
5%
10%
15%
20%
1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07
“Affordability products” as % of total mortgage originations
Subprime, Alt-A, Home Equity
Subprime
Home
Equity
Alt-A
Source: Inside Mortgage Finance.
3. Home prices in California are 35-40% over-valued
Now that the secondary market for these affordability products has all but evaporated, we
expect home prices in California to return to normalized levels (i.e. levels implied by
current and forecast disposable income in California as well as U.S. ten-year treasury
yields); this implies a 35-40% fall.
As of last August the median house price in California was $589K, but economic conditions
support prices between $350-380K (see Exhibit 1); material price declines are likely, in our
view.
While our model is helpful in estimating the magnitude of house price correction due for
the state of California, forecasting the timing of such a correction is trickier; the typical
response of the average Californian home owner to the prospect of falling house prices is
to not sell. Therefore, a correction of 35-40% could take many years to play out.
Californian mortgage credit quality is deteriorating quickly
Mortgage delinquencies in California are catching up to the national average
From 2000 to early 2006, Californian residential mortgage debt performed much better
than both historical and national averages, thanks to double-digit % annual home price
appreciation throughout that period.
Recently, however, home price appreciation in California has flattened out (e.g., up only
2% year-on-year in August 2007), although many counties have experienced declines.
Given the recent decline in investor demand for Californian residential mortgage debt (and,
subsequently, credit availability for consumers) in tandem with rising state unemployment,
we forecast significant house price depreciation leading to credit deterioration in California,
which is already accelerating above the national average (see Exhibit 3).
October 21, 2007 Americas: Specialty Finance: Mortgage Finance
Goldman Sachs Global Investment Research 4
Exhibit 3: Mortgage delinquencies up 63% in California in 2Q2007, versus 16% nationally
year-over-year change (%) in loans past due, Mortgage Bankers Association Delinquency Survey
-12.3%
16.5%
46.4%
-2.2%
5.2% 5.3%
9.8%
16.6%
63.0%
59.8%
39.6%
4.2% 1.1%
-16.9% -16.8%
1.2%
7.3% 2.3%
-3.4% -4.8%
-40.0%
-20.0%
0.0%
20.0%
40.0%
60.0%
80.0%
1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07
California United States
Source: Mortgage Bankers Association.
National housing fundamentals get worse before they get better
We continue to believe that the root cause of current credit fears is related to residential
mortgage lending standards which, distinct from that for other asset classes, remain
perversely influenced by secondary market demand for affordability product debt.
We remain bearish on the U.S. housing market; house prices are 13%-14% over-valued
nationally (which, like in California, could take several years to play out), growth in
mortgage debt outstanding continues to fall (driven by house price depreciation and
declines in the home ownership rate), and we have yet to see the worst of residential
mortgage credit deterioration (reset volumes for subprime ARMs are set to peak in March
2008, and recast volumes for option ARMs are set to peak in June 2010).
U.S. housing fundamentals get worse before they get better, in our view. We monitor
these fundamentals in three categories: (1) house prices, (2) growth in mortgage debt
outstanding, and (3) credit.
1. National house prices are 13%-14% over-valued
House prices are over-valued and a correction is underway (see Exhibits 4 and 5). The
median house price in America today ($234K is 13%-14% above the level implied by
current (and forecast) disposable income and rates ($202K-$204K). These two
macroeconomic factors (total U.S. disposable income and the U.S. 10-year treasury yield),
taken together, can explain 93% of the historical variation in house prices reported since
1972 (see Exhibit 4). The reliability of this relationship was even stronger (96%) prior to
2004; since 1Q2004, house prices have deviated significantly from our model.
October 21, 2007 Americas: Specialty Finance: Mortgage Finance
Goldman Sachs Global Investment Research 5
Exhibit 4: National house prices are 13%-14% over-valued, relative to forecast economic
conditions
50,000
100,000
150,000
200,000
$250,000
0 50 100 150 200 $250
Median US House Price
Quarterly since 1Q1972
Disposable income / Long-term rates
Total US disposable income as a multiple of the US 10-year treasury yield ($trillion, quarterly since 1Q1972)
R2 = 93% (1972-2007)
R2 = 96% (1972-2003)
GS Economic Forecasts
Disposable income / Long-term rates
2Q2007-4Q2008
From $201 to 207
Subsequent GS House Price Forecast
from $201,655 to $203,634
Current Median House Price = $234,400
2Q04 1Q04
3Q04
1Q05 4Q04
2Q05
3Q05
2Q06 1Q06
3Q06
4Q06
1Q07
2Q07
4Q05
Source: Census Bureau, FactSet, Goldman Sachs Economic forecasts, Goldman Sachs Research estimates.
As a check, we compared the current median house price to that implied by a long-term
(35-year) trend line; current prices are 8%-14% above the long-term trend (see Exhibit 5).
Deviation from the long-term trend, again, started in 1Q2004.
October 21, 2007 Americas: Specialty Finance: Mortgage Finance
Goldman Sachs Global Investment Research 6
Exhibit 5: National house prices are 8%-14% over-valued, relative to the long-term trend
line
Median US House Price
Quarterly since 1Q1972
50,000
100,000
150,000
200,000
$250,000
1Q72 1Q74 1Q76 1Q78 1Q80 1Q82 1Q84 1Q86 1Q88 1Q90 1Q92 1Q94 1Q96 1Q98 1Q00 1Q02 1Q04 1Q06
Recent “bubble”
commenced 1Q04
Subsequent GS House Price Forecast
from $200,807 to $215,749
Current Median House Price = $234,400
Late seventies “housing bubble”
Late eighties “housing bubble”
Source: Census Bureau, FactSet, Goldman Sachs Economic forecasts, Goldman Sachs Research estimates.
In 1Q2004, house prices started trending above levels hitherto predicted (quite accurately)
by two macro factors: disposable income and rates. Also in 1Q2004, house prices broke
away from a 35-year straight-line trend.
Above-trend house price progression (beginning in 1Q2004) coincided with increased sales
of non-traditional mortgage products (see Exhibit 2). Given that lenders – inspired by
secondary market demand for high-yielding debt – often pay their captive sales force
higher commission rates for sales of non-traditional (higher-margin) products, we are
sympathetic to the possibility that commission-encouraged sales of nontraditional
(“affordability”) mortgage products may have contributed significantly to the housing
bubble.
2. Growth in mortgage debt outstanding (MDO) continues to fall
The percent change in mortgage debt outstanding is the sum of percent changes in
median house prices, the U.S. home ownership rate, the average loan-to-value ratio, and
the number of U.S. households:
%Δ MDO = %Δ house prices + %Δ homeownership + %Δ loan-to-value + %Δ households
Historically, these factors, taken together, have had a consistent and positive impact on the
increasing growth in MDO (since 1995). However, recent declines in house prices and the
homeownership rate have had an impact on MDO growth (see Exhibit 6). Our forecast for
house price depreciation of 13%-14% (over three years) and a further decline in the
homeownership rate (back to 65%-66%) implies further downside for MDO growth.
October 21, 2007 Americas: Specialty Finance: Mortgage Finance
Goldman Sachs Global Investment Research 7
Exhibit 6: Growth in total U.S. mortgage debt outstanding (MDO) continues to fall
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
2000 2001 2002 2003 2004 2005 2006 2007 2008
Forecasts
Actuals House price depreciation
Falling homeownership rate
%Δ MDO = %Δ house prices + %Δ homeownership + %Δ loan-to-value + %Δ households
Change in mortgage debt outstanding (MDO)
%Δ year-on-year
Source: Mortgage Bankers Association, Census Bureau, FactSet, Goldman Sachs Economic forecasts, Goldman Sachs
Research estimates.
3. We have yet to see the worst of residential mortgage credit deterioration
Our estimated national schedule for adjustable rate mortgage resets (when low-interest
teaser rates reset to current rates) and recasts (when the pay-option expires and borrowers
are required to pay the fully-amortized rate) suggests that the worst of residential
mortgage credit deterioration has yet to be seen across this country.
Reset volumes for subprime adjustable-rate mortgages peak (at $42 bn) in March 2008;
recast volumes for pay-option adjustable-rate mortgages peak (at $24 bn) in June 2010
(see Exhibit 7).
October 21, 2007 Americas: Specialty Finance: Mortgage Finance
Goldman Sachs Global Investment Research 8
Exhibit 7: We have yet to see the worst of residential mortgage credit deterioration
across America, in our view
5
10
15
20
25
30
35
40
ARM reset and recast schedule
$ billions
0
2007 2008 2009 2010 2011
reset volumes for
subprime ARMs set to
peak in March 2008
recast volumes for payoption
ARMs set to
peak in June 2010
Subprime ARMs
Pay-option ARMs
Source: Goldman Sachs Research estimates.
October 21, 2007 Americas: Specialty Finance: Mortgage Finance
Goldman Sachs Global Investment Research 9
Reg AC
I, James Fotheringham, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company
or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific
recommendations or views expressed in this report.
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Disclosures
Coverage group(s) of stocks by primary analyst(s)
James Fotheringham: America-Mortgage Finance, America-Specialty Finance.
America-Mortgage Finance: Countrywide Financial Corp., Fannie Mae, Freddie Mac, Washington Mutual, Inc..
America-Specialty Finance: Advanta Corp., AerCap Holdings N.V., Aircastle Ltd., Ambac Financial Group, Inc., American Express Co., AmeriCredit
Corp., Assured Guaranty Ltd., H&R Block, Inc., CapitalSource Inc., CIT Group Inc., Discover Financial Services, First Marblehead Corp., Genesis Lease
Ltd., iStar Financial Inc., Jackson Hewitt Tax Service Inc., MBIA Inc., Nelnet Inc., NewStar Financial, Inc., Security Capital Assurance Ltd., SLM Corp..
Company-specific regulatory disclosures
The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies
covered by the Global Investment Research Division of Goldman Sachs and referred to in this research.
Goldman Sachs beneficially owned 1% or more of common equity (excluding positions managed by affiliates and business units not required to be
aggregated under US securities law) as of the month end preceding this report: Freddie Mac ($53.05)
Goldman Sachs has received compensation for investment banking services in the past 12 months: Countrywide Financial Corp. ($15.23), Fannie
Mae ($58.85), Freddie Mac ($53.05) and Washington Mutual, Inc. ($29.09)
Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Countrywide Financial
Corp. ($15.23), Fannie Mae ($58.85), Freddie Mac ($53.05) and Washington Mutual, Inc. ($29.09)
Goldman Sachs has received compensation for non-investment banking services during the past 12 months: Countrywide Financial Corp. ($15.23),
Fannie Mae ($58.85), Freddie Mac ($53.05) and Washington Mutual, Inc. ($29.09)
Goldman Sachs had an investment banking services client relationship during the past 12 months with: Countrywide Financial Corp. ($15.23), Fannie
Mae ($58.85), Freddie Mac ($53.05) and Washington Mutual, Inc. ($29.09)
Goldman Sachs had a non-investment banking securities-related services client relationship during the past 12 months with: Countrywide Financial
Corp. ($15.23), Fannie Mae ($58.85), Freddie Mac ($53.05) and Washington Mutual, Inc. ($29.09)
Goldman Sachs had a non-securities services client relationship during the past 12 months with: Countrywide Financial Corp. ($15.23), Fannie Mae
($58.85), Freddie Mac ($53.05) and Washington Mutual, Inc. ($29.09)
Goldman Sachs has managed or co-managed a public or Rule 144A offering in the past 12 months: Countrywide Financial Corp. ($15.23), Fannie
Mae ($58.85) and Freddie Mac ($53.05)
Goldman Sachs makes a market in the securities: Countrywide Financial Corp. ($15.23), Fannie Mae ($58.85), Freddie Mac ($53.05) and Washington
Mutual, Inc. ($29.09)
Goldman Sachs is a specialist in the relevant securities and will at any given time have an inventory position, "long" or "short," and may be on the
opposite side of orders executed on the relevant exchange: Fannie Mae ($58.85) and Washington Mutual, Inc. ($29.09)
October 21, 2007 Americas: Specialty Finance: Mortgage Finance
Goldman Sachs Global Investment Research 10
Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global coverage universe
Rating Distribution Investment Banking Relationships
Buy Hold Sell Buy Hold Sell
Global 29% 59% 12% 39% 32% 29%
As of Oct 1, 2007, Goldman Sachs Global Investment Research had investment ratings on 2,770 equity securities. Goldman Sachs assigns stocks as
Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for
the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below.
Price target and rating history chart(s)
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N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S
2004 2005 2006 2007
15
20
25
30
35
40
45
50
1,000
1,100
1,200
1,300
1,400
1,500
1,600
OP NA
Nov 4
OP
Sep 14
NA
Jan 31
S
Nov 16
Countrywide Financial Corp. (CFC)
Goldman Sachs rating and stock price target history
Currency: U.S. Dollar
Source: Goldman Sachs Investment Research for ratings and price targets; Reuters for daily closing prices as of 10/02/07.
Rating
Price target
Price target at removal
S&P 500; pricing by
FactSet
Covered by James Fotheringham,
as of Nov 16, 2006
Not covered by current analyst
New rating system as of 6/26/06
35 34.93 33
32
27
20
18
Stock Price
Index
Price
The price targets shown should be considered in the context of all prior published Goldman Sachs research, which may or
may not have included price targets, as well as developments relating to the company, its industry and financial markets.
N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S
2004 2005 2006 2007
32.50
35.00
37.50
40.00
42.50
45.00
47.50
1,000
1,100
1,200
1,300
1,400
1,500
1,600
U NA
Nov 4
IL
Oct 11
N
Jun 26
Washington Mutual, Inc. (WM)
Goldman Sachs rating and stock price target history
Currency: U.S. Dollar
Source: Goldman Sachs Investment Research for ratings and price targets; Reuters for daily closing prices as of 10/02/07.
Rating
Price target
Price target at removal
S&P 500; pricing by
FactSet
Covered by James Fotheringham,
as of Nov 16, 2006
Not covered by current analyst
New rating system as of 6/26/06
46.77
47
46
43
42
43
44
Stock Price
Index
Price
The price targets shown should be considered in the context of all prior published Goldman Sachs research, which may or
may not have included price targets, as well as developments relating to the company, its industry and financial markets.
N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S
2004 2005 2006 2007
50
55
60
65
70
75
1,000
1,100
1,200
1,300
1,400
1,500
1,600
NA N
Nov 16
Freddie Mac (FRE)
Goldman Sachs rating and stock price target history
Currency: U.S. Dollar
Source: Goldman Sachs Investment Research for ratings and price targets; Reuters for daily closing prices as of 10/02/07.
Rating
Price target
Price target at removal
S&P 500; pricing by
FactSet
Covered by James Fotheringham,
as of Nov 16, 2006
Not covered by current analyst
New rating system as of 6/26/06
74
73
Stock Price
Index
Price
The price targets shown should be considered in the context of all prior published Goldman Sachs research, which may or
may not have included price targets, as well as developments relating to the company, its industry and financial markets.
N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S
2004 2005 2006 2007
40
50
60
70
80
1,000
1,100
1,200
1,300
1,400
1,500
1,600
IL NA
Nov 4
N
Nov 16
Fannie Mae (FNM)
Goldman Sachs rating and stock price target history
Currency: U.S. Dollar
Source: Goldman Sachs Investment Research for ratings and price targets; Reuters for daily closing prices as of 10/02/07.
Rating
Price target
Price target at removal
S&P 500; pricing by
FactSet
Covered by James Fotheringham,
as of Nov 16, 2006
Not covered by current analyst
New rating system as of 6/26/06
66
77
Stock Price
Index
Price
The price targets shown should be considered in the context of all prior published Goldman Sachs research, which may or
may not have included price targets, as well as developments relating to the company, its industry and financial markets.
October 21, 2007 Americas: Specialty Finance: Mortgage Finance
Goldman Sachs Global Investment Research 11
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on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12
months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the
following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over
the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation.
Not Rated (NR). The investment rating and target price, if any, have been removed pursuant to Goldman Sachs policy when Goldman Sachs is
acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended
(RS). Goldman Sachs Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient
fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for
this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended coverage of this company. Not Covered (NC).
Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable.
Not Meaningful (NM). The information is not meaningful and is therefore excluded.
Ratings, coverage views and related definitions prior to June 26, 2006
Our rating system requires that analysts rank order the stocks in their coverage groups and assign one of three investment ratings (see definitions
below) within a ratings distribution guideline of no more than 25% of the stocks should be rated Outperform and no fewer than 10% rated
Underperform. The analyst assigns one of three coverage views (see definitions below), which represents the analyst's investment outlook on the
coverage group relative to the group's historical fundamentals and valuation. Each coverage group, listing all stocks covered in that group, is
available by primary analyst, stock and coverage group at http://www.gs.com/research/hedge.html.
Definitions
Outperform (OP). We expect this stock to outperform the median total return for the analyst's coverage universe over the next 12 months. In-Line
(IL). We expect this stock to perform in line with the median total return for the analyst's coverage universe over the next 12 months. Underperform
(U). We expect this stock to underperform the median total return for the analyst's coverage universe over the next 12 months.
Coverage views: Attractive (A). The investment outlook over the following 12 months is favorable relative to the coverage group's historical
fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12 months is neutral relative to the coverage group's
historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage
group's historical fundamentals and/or valuation.
Current Investment List (CIL). We expect stocks on this list to provide an absolute total return of approximately 15%-20% over the next 12 months.
We only assign this designation to stocks rated Outperform. We require a 12-month price target for stocks with this designation. Each stock on the
CIL will automatically come off the list after 90 days unless renewed by the covering analyst and the relevant Regional Investment Review
Committee.
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October 21, 2007 Americas: Specialty Finance: Mortgage Finance
Goldman Sachs Global Investment Research 12
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